Day-one rent is only the opening line. The lease also says how that rent moves: CPI, a fixed percentage, a market review, or a mix. Search "commercial rent review Australia" and you mostly get solicitor explainers. Useful for wording. Incomplete for buyers. I need to know how the review schedule changes the income spine I am about to Cap and stress-test.
I am a buyers agent for investors. I do not draft leases or run rent disputes. Your solicitor owns the clause and the retail versus non-retail rules. My lane is the underwrite: whether the escalations in this lease support the cashflow board and the offer number, or quietly rewrite them after settlement.
This sits beside face rent vs effective rent, why a commercial cashflow model can look scary in year one, and commercial passing rent vs net income. Those pages rebuild incentives, year-one boards, and net income. Here I stay on one gap: how rent reviews move the number after day one.
What a rent review is in buyer language
A rent review is the lease mechanism that resets or increases the contractual rent on set dates. It is not a friendly annual chat. It is a formula or process you buy when you buy the asset.
Common Australian commercial patterns:
- Fixed percentage each year (or on a stated anniversary).
- CPI linked to a named index series and formula.
- Market rent review that resets rent to current market on a stated date, often at an option or mid-term.
- Mixes, for example fixed or CPI annually, with a market review at option exercise.
Retail leases and non-retail commercial leases do not always follow the same rules on how far rent can fall at a market review. That is solicitor territory for your state and your lease type. I will not pretend a national one-liner covers every statute.
Fixed reviews: predictable, not automatically safe
A fixed review lifts rent by a set percentage or dollar amount. Cashflow modelling is easier because you can project the schedule without waiting for an index print or a valuer. That predictability is why many small commercial leases use fixed steps.
Buyer caution: predictable is not the same as market-honest. If the fixed step runs hotter than the precinct for years, the tenant may be paying above what a reletting would achieve when the firm term ends. If it runs cooler, your income growth underperforms the flyer story that assumed "strong escalations."
I do not publish a typical fixed percentage here. Markets and asset classes differ. Read the schedule on this lease, not a blog average.
CPI reviews: inflation linked, formula sensitive
A CPI review ties the increase to a Consumer Price Index series. It sounds objective. In practice, the clause only works if the index, city or national series, base quarter, and calculation method are clear. Ambiguous CPI wording is how parties end up arguing about arithmetic instead of the asset.
Buyer read:
1. Name the exact index series in the lease pack.
2. Confirm whether negative CPI can reduce rent, or whether the clause floors at zero.
3. Map CPI years into the cashflow board as a scenario, not as a promise that inflation always helps the landlord.
High inflation years lift income and can also lift tenant stress. Low inflation years slow growth. CPI is a risk share, not a free escalator.
Market reviews: reset risk, not a free upgrade
A market rent review resets rent by reference to current market for comparable premises. Timing often sits at option dates or longer review points. Process usually starts with the parties trying to agree, then an appointed valuer if they cannot.
For buyers, the underwrite questions matter more than the brochure optimism:
1. When is the next market review? A review six months after settlement is a different income risk from a review in year four.
2. What assumptions does the valuer use? Vacant possession versus sitting tenant, incentives ignored or included, fit-out ownership, and comparable evidence rules change the answer.
3. Can rent fall? Some non-retail commercial leases include ratchet-style wording that stops rent dropping on review. Many retail regimes restrict that outcome. Your solicitor confirms which regime you are in. I do not give legal advice on ratchet clauses.
4. Who pays for the valuer and how is the person appointed? Process cost and delay sit in the holding plan, not in the flyer Cap.
A market review is not automatically upside. In a soft precinct it can flatten growth. In a tight precinct it can jump rent and test covenant. Grade the schedule, do not assume the word "market" means "higher."
How reviews sit next to incentives and net income
Rent reviews move face rent. They do not erase incentives already granted. Face rent vs effective rent still applies: strip rent-free periods and fit-out contributions before you treat the escalated face number as cash.
Reviews also sit above outgoings recovery. A clean escalation on face rent still fails the income screen if landlord-retained costs eat the net. Rebuild recovery through gross lease vs net lease and passing rent vs net income before you celebrate a 3% or CPI step.
WALE still cares about firm term, not hope. How to calculate WALE keeps options separate from firm expiry. A market review tied to an option is not the same as contracted rent already in the firm term.
Buyer sequence before you Cap or stress the board
On commercial stock I run The Deal Grade™: letter A to C on the building, number 1 to 3 on the income. Escalation quality sits inside the income grade with covenant, firm term, incentives, and recovery.
Work this order before anyone argues Cap rate or year-one cash:
1. Pull the rent schedule and every review clause, including side letters.
2. List every review date across the firm term and any option path you are underwriting.
3. Label each date fixed, CPI, market, or mix, with the exact formula.
4. Rebuild day-one rent on effective rent and true net after outgoings, not flyer face rent.
5. Project a base case and a soft case for escalations. Soft case means CPI near zero, fixed steps only, or a flat market review where the lease allows it.
6. Flag the next market review as a covenant and vacancy stress point if rent could jump.
7. Only then Cap and stress year-one cash. Capitalisation rate for buyers and commercial property yield Australia sit after the income rebuild, not instead of it. Commercial cashflow year one separates rent quality from repayment design once the escalation path is honest.
If the selling pack cannot produce the review schedule, treat income growth claims as marketing.
Diligence questions I ask on the pack
- Where is the full rent and review schedule, not a one-line summary?
- Which index and formula apply on CPI dates?
- Is there a floor that stops CPI or market rent falling?
- What is the appointment process and cost split for a market determination?
- Do retail lease rules in this state change the market-review outcome?
- How do outstanding incentives interact with the next review date?
- What does the cashflow board assume for years two to five: fixed, CPI print, or hopeful market upsides?
Commercial property due diligence is the wider pack. Reviews are one spine inside it.
Next step
If you are grading a commercial income asset and the lease pack is light on escalations, start with capital, income need, and risk posture on the Commercial Ready Check via go-commercial. Soft next step is a strategy conversation on your numbers, not a product pitch.
Bring the lease, rent schedule, incentive side letters, and any cashflow board you already have. If the review path is missing, that is the first gap we close before anyone Cap's a growth story that is not in the document.
Frequently asked questions
What is a commercial rent review in Australia?
It is the lease mechanism that increases or resets contractual rent on set dates, usually by a fixed percentage, a CPI formula, a market determination, or a mix. It is part of the income asset you buy, not an optional annual chat.
Is a fixed percentage review better than CPI?
Neither is automatically better. Fixed reviews are easier to model. CPI tracks an inflation series and can run hot or cold. Grade the actual schedule against tenant covenant and reletting risk for this asset, not a generic preference.
Can rent fall at a market review?
Sometimes. It depends on the lease wording and whether retail lease rules in that state restrict ratchet-style outcomes. Your solicitor confirms the regime for your lease. Buyers should model a flat case where a fall is possible, and a jump case where market evidence supports one.
How do rent reviews affect Cap rate and yield?
Cap and yield are only as honest as the income input. Escalations change future rent. They do not fix a day-one rebuild that still uses face rent, ignores incentives, or skips outgoings. Rebuild net income first, then apply Cap and yield screens.
What should I bring to diligence on reviews?
The executed lease, every variation and side letter, the full rent and review schedule, incentive details, and the cashflow assumptions used for years after settlement. Ask which scenario the growth line assumes before you treat it as contracted.
*Seek licensed professional advice specific to your situation before acting. This is general information only.*
